Understanding US and Consumer Debt
Key Points – Understanding US and Consumer Debt:
- Understanding Consumer Debt
- US Debt Compared to Other Countries
- Understanding Consumer Debt
- Factoring Debt into Your Financial Plan
- 23 minute read | 38 minutes to listen
Total US national debt now eclipses $28 trillion. Total US household debt eclipses $14 trillion. Both all-time highs. What does this mean to the US economy? What does it mean to you financially? Join Dean Barber and Bud Kasper as they examine the US national debt and consumer debt.
Video: Revisiting the National Debt Discussion
Understanding US and Consumer Debt
Dean Barber: Thanks for joining us here on America’s Wealth Management Show. I’m your host Dean Barber along with Bud Kasper. Well, Bud, you and I will be talking about something that gets mixed up. We’re going to talk about debt today and-
Bud Kasper: That’s a dirty four-letter word.
Debt is a Tool
Dean Barber: Before we start talking about debt, we should consider that debt is a tool.
Bud Kasper: It is.
Dean Barber: And it’s just like any tool; it can be used for good or bad. And properly used debt can do some decent things for individuals. Improperly used, it can do what it did back in 2008 during the great financial crisis.
Bud Kasper: It can harm us from that perspective, but you’re right. Almost every country is carrying some amount of debt. At what point does it reverse on you and start harming your economy instead of helping it?
Today’s Topics: US Debt and Consumer Debt
Dean Barber: Well, so we’re going to do two pieces of debt today, and we’re going to talk about them collectively. We want to talk about US debt, and then we will talk about consumer debt and public debt.
Understanding US Debt
Dean Barber: So, the US debt is in the spotlight, currently sitting at about $28.5 trillion. So it’s significant, but as a percentage of GDP, it’s not as bad as what people would think.
Bud Kasper: Yeah. I agree with that statement. That’s, of course, the national debt clock. Probably everybody who listens to the show has seen that at one time or the other. Those numbers are constantly moving up, which scares the tar out of you, as it probably should. But the point you just made is accurate; when does it become a real issue? When does it not become productive?
US Debt as a Percentage of GDP
“We’re the prettiest house on an ugly block.” – Dean Barber
Dean Barber: Right. As a percentage of GDP last year, debt to GDP was 107%.
Bud Kasper: Mm-hmm.
Dean Barber: Okay. Today debt to GDP is about 120%. So yes, that’s up, but our debt to GDP doesn’t even fall in the top 10 of developed countries.
Bud Kasper: Right. That’s pretty amazing.
Dean Barber: So we’re the prettiest house on an ugly block.
US Debt Compared to the Rest of the World
Japan’s Debt
Bud Kasper: That’s one way of looking at it. I mean, everybody remembers the case with Japan and everything else. They had tremendous debt, and they still do today. They’ve done everything in their power to try to re-stimulate their economy so the debt ratio would decrease, but not with the success that they had hoped for, Dean.
Dean Barber: No, look at Japan’s debt to GDP now; it’s 266% of GDP. A year ago, it was 238% of GDP.
China’s Debt
It’s interesting because people say that China must be doing something right. Because China, their debt to GDP is 50.5%.
Bud Kasper: I don’t know if I can trust those numbers from that perspective, but yeah, that’s where they list.
Dean Barber: Well, here’s the deal, in China, nearly 50% of the corporations are what are called SOE’s or state-owned enterprises.
Bud Kasper: Right.
Dean Barber: Okay. So if you take the collective debt of those state-owned enterprises, and you add that to what China reports as their national debt, you’d have a debt to GDP at 317% of their GDP.
Bud Kasper: There you go.
Dean Barber: Because they’ve got 109 companies on the Fortune Global 500 list, and only 15% of those are privately owned. The rest are state-owned enterprises. So if they’re state-owned enterprises and they carry debt, wouldn’t you assume that debt is a part of what China owes overall?
Bud Kasper: Of course you would, but it’s a matter of semantics at this particular time, isn’t it?
US Debt, Stimulus, and Inflation
Dean Barber: Yeah. Between the stimulus, all the money in circulation, and all of this debt, people believe that it could cause inflation.
Bud Kasper: And that’s one of our greatest fears, the great eroder, which is inflation, because what does it do? It takes away your spending power. So this is where the rubber hits the road. This is where it impacts citizens of our country trying to pay their bills and buy the necessary things and things that are sometimes unnecessary. But still, they’re in that game.
Looking at US Debt in the 1990s and 2000s
Dean Barber: So we know that debt is high, Bud. Think about this, going back into the mid to late ’90s and then into the early 2000s. We had this significant discussion about our national debt and what it was doing. Are we saddling future generations with an insurmountable amount of debt? Are we ever going to be able to get out of this debt? And is it healthy debt? Or is it okay?
Today’s Politicking
Bud Kasper: Yeah. No doubt about it. Especially when you look back at what’s happening politically, Dean, we have significant issues being debated in Congress right now because politicians would prefer to raise public debt than raise taxes.
And so in doing that, it’s a way to get what you want, while not having to go to the people and say, I’m going to take more out of your pocket to be able to do it. Well, it is the same pocket; it’s just a matter of using the debt portion of it, as opposed to individuals paying more taxes to fund these enterprises.
Eventually, Debts Need to be Repaid
Dean Barber: But that’s like saying I’d rather put something on my credit card than pay cash for it, so I don’t have to think about it.
Bud Kasper: I agree. That’s a good way of putting it.
Dean Barber: Eventually, it does have to be repaid.
Bud Kasper: Yeah. And public debt’s about 77% of GDP. It goes much further than that. It starts with slow growth, but we do not see it yet.
Dean Barber: Yeah. I want to invite you to read the latest article from Shane Barber, one of the partners here at Modern Wealth Management. In the article, he reflects on the US Debt and compares it to what’s going on globally, and then really dives deep into consumer debt. There’s a lot of excellent information in that piece we’ll be sharing throughout the show.
Impact of the Recent Stimulus on the Debt
Dean Barber: Bud, we talked about how our US debt has skyrocketed to $28.53 trillion, and that’s up from $22 trillion a year ago. All right. So.
Bud Kasper: To be fair with them, because a lot of that is in COVID-19.
Dean Barber: There is zero question that’s a big part of it, Bud, and it was necessary to save the economy from what could have been economic ruin.
Bud Kasper: Absolutely.
The Swift Reaction to COVID
Dean Barber: And a little sidebar. It was fascinating how quickly the government was able to react. It’s as if they dusted off the rules and the things they did back in 2008 during the Great Recession. And they just said, well, let’s do this again, but let’s add a couple of things to it, and boom, within less than a month of things starting to fall apart, there they were.
Bud Kasper: Right.
Dean Barber: Right.
Bud Kasper: Well, it’s kind of like, “Have you seen this show before?”
Dean Barber: Yeah.
Bud Kasper: You know, we learn from past mistakes and things out of our control. Will they be as effective this time around?
Total Outstanding Debt in 2000
Dean Barber: Right. And here’s, here’s what people are fearful of Bud if we go back 21 years, to the year 2000, our total public outstanding debt then was roughly $5 trillion, okay?
When you compare that to our total GDP, our gross domestic product at about $10 trillion, our debt to GDP ratio was about 50%. That’s what China says theirs this today, but we just talked about the state-owned enterprises, and we know that that’s not the case.
Bud Kasper: Yeah, I read an article that said that when public debt reaches 77% of GDP or higher, the debt starts to become an impediment to growth.
Quick Glimpse at US Debt to GDP
Dean Barber: Right. All right. So here’s what’s happened. So remember, in 2000, you had a GDP (gross domestic product) of $10 trillion. You had a debt of $5 trillion. Today, you’ve got GDP at $22.74 trillion, and you’ve got debt at $28.5 trillion. The debt exceeded GDP in about 2013. That’s the point at which we were about 100%.
Bud Kasper: Yeah. The reality is that our debt is 102% of GDP. They’re projecting it’s going to go to 107% of GDP.
The Debt Quadrupled in 20 Years
Dean Barber: Bud, debt has increased since 2000 by 394% while our GDP has increased 117% since 2000. So there is a 20 year period, two decades, where debt had almost quadrupled, and our GDP has just over doubled.
What Does it All Mean to Me?
“We’ve never been here before.” – Dean Barber
Bud Kasper: Exactly right. And I’m sure you know, our listeners right now, are going with gee-whiz guys, you keep throwing all these numbers at us. Just tell me the story. What does it mean to me? Are we in trouble as a nation with all this debt? Is it necessary for us to make radical changes to bring this debt down at this particular time? If they were to do that, does that mean my projected gains on investments that I have money in would not be able to produce those returns?
Dean Barber: Well, Bud, here’s the thing. We’ve never been here before. Okay? We can look at other developed countries, and Japan is a perfect example to look at. They’ve been well over 100% of debt to GDP for decades now. And how has that impacted their economy? They’ve got a totally different problem than we do.
They’re not growing their population enough to support the social systems that they have in place. And so that’s causing more and more debt.
How the US Finances Debt
But think about how the US finances that debt and look at the rate on the 10-year treasury. When somebody buys a 10-year treasury or somebody buys a 30-year treasury, basically that is the government borrowing their money. That’s the debt.
Bud Kasper: Mm-hmm.
Dean Barber: Okay. So, we sell treasuries to borrow money. And today, the 10-year treasury is sitting at about 1.3%.
Bud Kasper: Right, that sounds right.
Dean Barber: Our 30-year treasury currently sits at 2.014%.
Bud Kasper: Okay.
Dean Barber: So less than 2.1%. So if we can borrow money for 30 years at 2%, maybe that’s not so bad.
Losing Confidence in the System
Bud Kasper: Yeah. Right. I agree with that statement. Look back at the debt accumulated in the Jimmy Carter era at the 15% level. Now that wasn’t what the treasuries were. That’s the overall market, but what a different situation that was. But you know, if debt continues to climb, at some point, investors will lose confidence in the government’s ability to pay back that debt, and when that happens? Now we’ve lost confidence in the system, and that’s when trouble starts.
What’s Really Happening to the Money?
Dean Barber: Yes, no question about it. So that’s what our Federal Government is doing. Then you got to ask the question, “Okay, so they’re borrowing all this money. What are they really doing with it?”
Bud Kasper: Mm-hmm.
Dean Barber: Is it an effective use of the money? I could say there’s an awful lot of waste in our government. And I don’t think anybody, whether you’re a Republican or Democrat, could disagree that there is a ton of waste.
Would we do that as individuals? Some people do. Some people take on bad debt, Bud, and some people just borrow it, and they don’t do anything with it. But I want to give a couple of examples of how debt can be used positively, okay?
Bud Kasper: Yeah.
Story Time: Using Consumer Debt as a Tool
Dean Barber: So, last year during the pandemic, I had a client who’d been retired for two or three years. They called up, and they said, “Hey Dean, we’re thinking about buying a second home. We’ve got a lot of friends in Wisconsin. We want to spend summers up there, and it’s a beautiful place. We can buy a place right on the lake. It’s about $450,000. We want to know if we can do that.” So, of course, we turn to the financial plan that we created, which is updated regularly throughout the years.
We said, “Okay, we’ve got options. We’ve got money to pay cash for this house if we wanted to. We could put a down payment of 10% or 20% or 30% or whatever.” So when we went in and tried to identify the best-case scenario for this couple, we decided against paying cash for the house because they would have had to withdraw a pretty significant portion of that from their IRA. And of course–
Bud Kasper: Taxes.
Dean Barber: Taxes on that, and then it jumps them up, and their Medicare premiums stay higher for a couple of years. So there are all kinds of things that go into it that suggest, “No, we don’t want to take that much money out of an IRA in a single year.”
What Did They Do?
So we wound up doing 30% down, which we had the cash to do. So we didn’t have to pull money out of the IRA.
Bud Kasper: Mm-hmm.
Dean Barber: We borrowed at a very reasonable rate, as you know, down in the 3% range. And then we just took a systematic withdrawal out of the IRA to make the mortgage payment.
Bud Kasper: Mm-hmm.
Dean Barber: And that’s the scenario that worked best in their overall financial plan. It gave them the least amount of taxes, and the best outcome at the end, as far as ending value at the end of the plan.
Bud Kasper: Sure.
Dean Barber: So, that was a good use of debt.
Sources Matter
Bud Kasper: That’s right. And this is where the sources of money make a huge difference. If you’re looking at money coming out of the IRA, it will be taxable at some level. If you understand that in advance, you’re not going to exceed that level. So it doesn’t put you in another tax bracket as long as you have another source of money that’s already been taxed. You can utilize this in the overall plan.
Dean Barber: Right.
Bud Kasper: I don’t want this to sound complicated; it isn’t, from the perspective we’re looking at now. But many times, people don’t even think that through to understand that you’re just giving money, needlessly to Uncle Sam, that you don’t have to.
Looking Down the Road
Dean Barber: No, you’re exactly right, Bud. And as we talked through that whole scenario with my client, I pointed out to them, I said, “Look, you’re in your late sixties. You’re not going to have these two houses for your entire life. There’s going to become a point where you won’t want to travel to Wisconsin every summer. Maybe it’s 15 years, and perhaps it’s 20 years. But then, you will have paid down enough on the house. You’re going to sell it anyway, and the cash will come back into your retirement household.”
So this illustrates not just a discussion of debt but the discussion of using debt as a tool and using it within your overarching financial plan to discover your best options to do the things you genuinely want to do. And that’s what our Guided Retirement System™ does, Bud. It provides that clarity to people to get out there and do the things they want to do, knowing they’re making the right decisions.
Bud Kasper: Exactly. I love the way you put that, Dean. You know, there’s leverage in the power of leverage inside your plan that can be utilized, but you want to have it used in the most effective and non-taxing way possible.
Dean Barber: Make sure that you read the article on Revisiting the National Debt Discussion. A lot of great literature in there. For now, we’re going to reflect on what has happened to household debt since the Great Recession in 2008.
Understanding Consumer Debt
Dean Barber: We’re going to switch gears, and we’re going to talk about consumer debt. Okay.
Dean Barber: And so we’re going to take a look back to the great recession here, Bud. So when we look at total US household debt in 2007, at the peak of it, we were sitting at about 12 trillion, just a little over $12 trillion of our household debt. Today, we’re sitting at 14.64 trillion of total household debt. So we’ve got two and a half-trillion dollars more debt at the household level than we did just eight years ago. And if we take this back to 2000, like we did the national debt a few minutes ago, the household debt then was about four and a half trillion. Okay. So we’ve gone up, almost quadrupled the household debt in the last 20 years.
Bud Kasper: Understand. But when you think about it, especially in the last decade, debt has been inexpensive. So, therefore, people often use the advantage of having lower interest rates to accomplish some of the things they want both personally and in business.
Looking at Consumer Debt and Debt Service as a Percentage of Household Income
Dean Barber: Right. And that’s where I wanted to go with this. So we know that household debt has increased from a little over 12 trillion to 14.6 trillion since 2008, since the Great Recession. Still, the total debt service at the household level, as a percentage of disposable income, in 2007 was about 13% of disposable income. That was the debt service. And today it’s just 9.41%.
Dean Barber: So if you look at 20 year period, debt has increased 222%, but debt service as a percentage of household income has declined by 16.75%. So if you look at it that way, households are healthier financially today than they were 20 years ago, even though the amount of debt that we have at the household level has increased by 222%.
Dean Barber: So what’s the cause of that? Well, the refinance boom, Bud, that hit after the great recession, when the interest rates got dropped to zero, the refinance boom that happened again right after the COVID crisis when people were refinancing at two and a half and 3%. So they’re refinancing that debt. It’s not the same thing that was happening back in 2000 and, I’ll call it 2004 to 2007, where everybody was running the ads, “If you have a home, we’ll loan you up to 120% of the value of your home. You can go out and buy your new car with that.”
Dean Barber: And that was a horrible idea. That’s not what’s happening today. That’s not the debt that we’re taking on. We’re refinancing the debt. We’re lowering the debt service as a percentage of our household income, making the American consumer stronger, which is one of the reasons why we’ve seen the American consumer thriving. That’s one of the things that’s causing these inflationary fears, Bud.
Consumer May Be More Financially Stable Today
But if you think about it, to have a healthy economy, the consumer has to be more financially stable and have more disposable income if I reduce my debt service as a percentage of the household income from 13% down to 9.41%. That gives me more disposable income to do other things.
Bud Kasper: Right. And that was the point I was going to make because the cost of debt is lower. It’s lending us opportunities to increase our savings rate for retirement. And that is a big, big thing right now. People need to understand, and a lot of them are taken advantage of. And now we go back, and where are you saving? Your 401(k), IRAs, Roth IRAs, Roth 401(k)s.
It’s time to get busy because how long before we start to see interest rates begin to rise because we’re taking on more debt. Now, if the interest rate stays low, we’ll be okay. If interest rates start to rise, the game’s going to change.
Consumer Debt Interest Rates
Dean Barber: Right. And if you’re taking on debt as a consumer today, especially house debt on real estate, the last thing you want to do is an adjustable-rate mortgage. You want to do a fixed-rate mortgage for 30 years. Don’t even think about a 15 year.
Bud Kasper: Yes. Not necessary. And you also look at the cars. Zero percent financing. Why wouldn’t you do that?
Dean Barber: Or 0.9% or even 1.9%.
Bud Kasper: Yes, totally reasonable. That will change at some point in time, especially if we continue to pile on debt. You’ll start to see that change, I believe.
Dean Barber: Yes. No. And, Bud, I’ve even had-
Bud Kasper: It’s happening now.
Using Debt as a Tool in the Financial Plan
Dean Barber: It is. I’ve seen scenarios where someone will come in, and they’re visiting with one of our CFP® Professionals. They still have a mortgage on their house. They’re five years out from retirement and will pay off the house in 20 years. So they might have 15 years’ worth of mortgage payment in retirement.
When we run that, and we put that into the plan that that’s the way the mortgage is today. And then we say, “Okay, what would happen if we actually refinanced that mortgage and we did a 30-year note, and so we decrease the amount of the mortgage payment, but we pay it for a longer period.”
Dean Barber: Which one of those two scenarios then winds up working better in the overall retirement plan? And that’s something that you don’t know unless you’re doing comprehensive financial planning. And our guided retirement system looks at every aspect of a person’s life and considers everything, including whether you have good debt or bad debt.
Controlling Your Finances
Bud Kasper: Right. I agree with that. Here’s the beauty of it all. Understanding all this and seeing the impact of vetting through these different things that Dean and I are talking about today gives you more control.
You start to feel that, “You know what? I get this now. I’m starting to understand what’s going on here. I’m able to add a payment to my mortgage debt every year. And I figure I can be out of debt in 25 years, as opposed to 30 years.”
It’s a mindset. But when you see the numbers in front of you, and those are your numbers, not somebody else’s numbers, that’s when the control can come in.
Story Time: Buying a New Car in Retirement
Dean Barber: Yes. No doubt about it. I had a situation a couple of months ago where one of my clients wanted to buy a new car. I’m like, “Okay, well, let’s talk about what kind of car do you want to buy? Let’s look at the deals that are out there. Let’s understand what financing options are available,” et cetera, et cetera.
We did a lot of research over the course of a year. These are very conservative people who didn’t get wealthy because they made tons of money. They got wealthy because they were frugal, and they did the right things with the money and lived below their means.
Dean Barber: So I was on the phone with them about a month ago, and they said, “Dean, we did it. We got the new car.” And I said, “And how did you do it?” They said, “We did what you told us to do. They had 0.9% financing on it. So we did the 0.9% financing.”
Bud Kasper: Yes. And I’m going through that right now with my daughter. I have to get a car for her. It’s going to be a used car. So I’m going through the listing of vehicles. What’s the first thing I went through? Safety. What are the safest cars out there? And I have my list of things that I need to accomplish.
Dean Barber: That’s what happens when you have a wild child.
Bud Kasper: That’s right. Two seatbelts!
[Laughter]
Dean Barber: Right, and I’m sure she didn’t get that from you, right?
Bud Kasper: No. No, not at all.
Factoring Debt into the Financial Plan is Crucial
Dean Barber: Yes. The point is this. When you’re talking about whether to take on debt or pay off debt, the obvious answer to that question doesn’t come until you can put that data within the context of your overall financial plan.
It doesn’t matter where you are in your phase of life, whether you’re in the accumulation phase, whether you’re in that transition phase, going from work to retirement, or whether you’re in the maturity phase, where you’re already retired and doing things. You still have to look at that.
The only way you can do it and make the right decision is by having a comprehensive financial plan. Then you plug in different scenarios to say, “What gives me the best outcome from a tax perspective, from an income perspective, from a success perspective, and the health of my overall plan?”
Bud Kasper: Yes. That’s heavy vetting. As you go through it to see, do the numbers play out in your favor?
Dean Barber: And that’s what a CERTIFIED FINANCIAL PLANNER™ does. They’re not just there to talk to you about your investments.
Revisiting the National Debt Discussion
Dean Barber: I encourage you to read Revisiting the National Debt Discussion by Shane Barber. He revisits, “Okay, where were we a year ago? Where are we today? How do we stack up against other developed countries? And what is the overall health of our economy? What is the overall health of the debt that we’ve taken on? And what are the risks that are out there as well?”
Dean Barber: All right. So, Bud, We’ve been talking about the national debt. We’ve been talking about consumer debt. And we’ve talked about how there’s good debt and bad debt. One of the things that I think, Bud, that people are concerned about is, can we continue on this path?
The Current Politics About US Debt
From a political perspective, I guess we have to step back and look at what’s being proposed and what has already been enacted just here in 2021. We had the $1.9 trillion COVID relief package that was passed earlier this year with zero Republican votes, and then we have the $1.2 trillion infrastructure plan that has just passed–
Bud Kasper: The Senate.
Dean Barber: –the Senate. So combined there, you’ve got 3.1 trillion. And now, or just this last week, you had another $3.5 trillion package proposed by the Democrats.
Here’s the problem. We’re going to hit a debt ceiling, and you have to have enough votes from Republicans to get that debt ceiling passed. And that’s going to be challenging to get.
Bud Kasper: And it should be.
Dean Barber: Right. There’s going to have to be some concessions. So you could say, take a look at the original infrastructure plan was $2 trillion. Through negotiations and reaching across the aisle, you got a bipartisan bill that is $1.2 trillion. I don’t think anybody can argue about improving our infrastructure.
When you look at the $3.5 trillion plan and what’s in there, there’s a lot of stuff in there that are expansions of the social system. Now there’s a couple of things that I like in that plan, decreasing the age for Medicare eligibility. We have many clients and many people who would like to retire in their early 60s, but they stay at work because they can’t get Medicare until 65.
Bud Kasper: That’s right.
Dean Barber: That’s something that I think I could get on board with, but there are other things in there. There’s not much detail behind any of the things they put together, so we don’t know.
The Debt Ceiling
But again, it’s one of those deals where I think they’re going to start at $3.5 trillion. We’re going to run into the debt ceiling. They’re not going to be able to pass that without an increase in our debt ceiling, and they’re not going to be able to get that increase in the debt ceiling without some pretty major concessions in the $3.5 trillion package.
Bud, the bottom line is that’s $6.6 trillion of additional debt that our government is throwing on top of where we are today.
If the US Debt was Split Between All US Households
Bud Kasper: And yet they say that we can absorb that debt because the benefit going into the future will take care of it. No, it won’t. When you look at the debt right now at $28 trillion, and you divide it by the number of citizens, by households, it’s $225,000 per household to erase the debt that we have today.
So let’s ask our listeners. Do you have $225,000 you’re willing to give the governance so we can get our debt completely erased at this time? The answer, of course, is obviously no.
Dean Barber: Well, obviously, you know that if you gave $225,000 to the government, they’re not going to pay down the debt.
Bud Kasper: No, they’ll find something else too. I think people also need to understand what the Federal Reserve is doing, and that is the issuance of bonds because it’s the sale of bonds that helps fund the difference between where other revenues are coming from, taxes, and things like that.
And they have been fixated on doing that to keep interest rates low at this particular time. But now we’re talking about the famous tapering that may occur in the future. What all that means, folks is that the interest rates start to rise.
Has Inflation Peaked?
Dean Barber: Well, and Bud, the good news is that we did see the inflation numbers come in, and they were about where they were expected to be. When you take out energy and food, they were a little bit below what expectations were.
So the things that I’m reading indicate that inflation has likely peaked, and we’re on our way down. So, maybe Powell was right when he said that the inflation that we were seeing was transitory.
Bud Kasper: Yes, transitory meaning short-lived, but when we look at that, we understand the power that the Federal Reserve has in terms of how they adjust those interest rates. The impact that it can have on the amount of indebtedness that we take on is parallel to what we’re talking about today.
The Power of the Consumer
Dean Barber: Yeah, no question about it. Here’s the thing. So the government thinks that they can send us into economic success. But if you think about it, the consumer does that because consumer spending makes up 70% of our total GDP.
So if we look at our total GDP right now, as of July, the Total GDP is 22.74 trillion. All right. So 70% of that, or roughly 15 trillion, is consumer spending. And as the consumer spends, that’s what drives our economic activity.
Dean Barber: We talked about earlier in the program how the consumer, from a financial perspective, even though they’re more in debt than they were 20 years ago, the actual debt service as a percentage of household income has declined by 16.75%.
As part of this new $3.5 trillion spending package, some pretty significant tax increases are coming along with that to help pay for that $3.5 trillion. If you take money out of the consumer’s pocket, who is the 800-pound gorilla in the corner for our US economy, then that will slow our GDP growth. If that thing passes and taxes go up, I’m going to tell you that our GDP growth will slow down.
Bud Kasper: Sure. And think what is going to do to investments simultaneously because I would be remiss if I didn’t say I think the stock market most certainly would be in trouble at that point.
Overvalued Markets
Dean Barber: Well, there’s no question. And look, especially when you’ve got markets as overvalued as what they are today. The markets are looking for continued economic growth and continued strength in the consumer, but we start raising taxes on the consumer, which is money they can’t spend. That slows the economy.
Bud Kasper: Right. Remember what I said earlier, and that was public debt when it reaches 77% of GDP, which begins to slow the economic growth.
Dean Barber: And we’re now at 120% of GDP.
Bud Kasper: So what does that tell you? We’ve got to make some adjustments inside of this. A lot of what was done was necessary. COVID was a situation. We needed that fiscal stimulus to get us back on track. And sure enough, this thing has drug on longer than what we ever anticipated it would be. But we are back in the situation where we need to be careful with our fiscal policies.
Dean Barber: And all of this plays into your finances at some level. And it’s more critical today than ever before that you have a well-crafted financial plan.
Understand How the US Debt Could Impact You
Our Guided Retirement System™ looks at every aspect of your financial life, from taxes to estate planning, risk management, investments, debt, et cetera.
Dean Barber: It’s not often, Bud, that we do a show where we tackle all this, but this is fascinating information of what we see happening today, and it will leak back into the household level. We don’t know exactly how it will impact individual households, but we know it’s going to. It’s going to cause a change in a lot of different areas. So having the financial plan helps you react to that logically and rationally instead of in an emotional way.
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Bud Kasper: Exactly, so you know how it’s going to impact you.
Dean Barber: Exactly. Well, we appreciate you joining us here on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. Stay healthy, stay safe. We’ll be back with you next week. Same time, same place.
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